A bill to raise gas and cigarette taxes to fund road repairs has reached its deathbed as the Indiana legislature ended its session.
Yesterday, the legislature approved an $800 million road funding plan without raising gas and cigarette taxes. The plan taps into the state’s $2 billion budget reserve and diverts more of the current gas tax revenue toward infrastructure. Approximately $232 million will be for state highway improvements, and about $585 million will go to local governments for their own projects. The funding package now heads to Gov. Mike Pence (R-Ind.).
The Indiana House had previously passed hundreds of millions of dollars in tax hikes in House Bill 1001, but opposition from Pence and the state Senate resulted in a halting of efforts by Speaker Brian Bosma to raise taxes on low-income consumers and commuters.
This is a big victory for Hoosier taxpayers, since a small majority of House members were pushing for the tax hikes just last week. With the state sitting on a $2 billion surplus, a compromise without raising taxes is the best deal for taxpayers. A temporary fix also buys time for the legislature to find a long-term plan without requiring new revenue, in the 2017 budget year.
If HB 1001 had passed with the tax hikes, Hoosiers would have seen:
An immediate 4-cent increase on the gas tax. With all fees included, Indiana’s gas tax is nearly $0.30. Adding on four cents would put it higher than all of its neighboring states. The gas tax would rake in $116.7 million in 2017. The revenue would gradually decrease following years; by 2020, the tax would earn $113.8 million.
A $1 increase on the cigarette tax. Indiana’s current 99-cent per pack tax is regionally competitive, lower than all neighboring states except Kentucky’s 66-cent tax. Indiana’s proposed $1.99 tax would be nearly in line with Michigan’s $2 and higher than the taxes in Illinois and Ohio. The tax hike would generate $254.2 million annually, ignoring the impact of cross-border sales and the tobacco black market.
The compromise for taxpayers in the bill was a gradual drop in income tax rates beginning in 2019. Reducing the income tax from the 2017 rate of 3.23 percent to 3.19 percent in 2019 saves taxpayers $33.6 million. It would take seven years to completely phase in the income tax cut, and savings would reach $367.3 million if fully phased in.
But while the cigarette and gas taxes would have both been in effect in 2017, taxpayers would not have seen any income tax cuts until 2019. When the $33.6 million income tax cut factors in with $369.2 million in gas and cigarette tax hikes in 2019, this still results in taxpayers pitching in $335.6 million more. The tax burden also shifts more to low-income earners, since income taxes would go down and cigarette taxes would go up.
Americans for Tax Reform urged Indiana House legislators to reject HB 1001, a violation of the Taxpayer Protection Pledge to Indiana taxpayers in a January letter.
The Senate had dismissed Pence’s alternative to HB 1001, which would have used bonds for a quarter of road funding.
Legislators were also considering adding toll booths to interstate roads, but both sides agree this solution needs further study.